Payroll Overpayment Challenges: Legal and Practical ImplicationsHR Resource
November 15, 2012 — 2,405 views
Payroll Overpayment Challenges: Legal and Practical Implications
Everybody makes mistakes. When dealing with payroll, however, mistakes can be difficult to correct. Overpayment of wages due to human or technical error can be messy, regardless of whether the error was on the part of the employee or the employer. Many factors affect the employer’s ability to recoup overpayment of wages, including wage and hour rules, state statutes, deductions to the overpayment, and current employment status.
The Fair Labor Standards Act treats wage overpayment in terms of an advance or loan, allowing for employers to recoup the overpayment. This does not mean, however, that employers can just deduct the overpayment from future earnings. Many states have their own statutory language regarding wage repayment that specifies how an employer may recoup the overpayment. For example, employees may have to obtain written agreement from the employee to the repayment. States may also include language as to the amount of time employers have to recover overpayments.
Other factors include whether the employee is classified as exempt or nonexempt, and whether they belong to a union. Because many exempt employees are paid based on their position, rather than hours worked, wage overpayments may be more difficult to recoup. Statutory language may specify instances under which overpayments may be recovered for exempt employees. Anything outside of that scope may be problematic. If employees are covered by a collective bargaining agreement, employers should refer to that agreement for guidance, and may expect the union to move through the grievance process before a resolution is reached.
The current status of the employee may also complicate matters. Current employees may have their future wages reduced in order to repay an overpayment; this is not an option for former employees. Therefore, it may be more difficult to recover overpaid wages from former employees.
Taxes and other deductions such as for 401k or other benefits must also be taken into account. The IRS has rules regarding wage repayment, and employers should be aware of these.
Whether they are required by statute to notify their employees or seek consent to repay, employers should let employees know about any overpayments as soon as they are discovered. Employers should include the amount overpaid, timeframe during which the overpayment occurred and information about taxes and other deductions. Most employees will understand that a mistake has been made and want to rectify the situation. Often, employees will agree to a reasonable repayment schedule.